Record foreclosures raise questions

A record percentage of U.S. homeowners are facing foreclosure. Many more are falling behind on house payments.

Don't panic, urges Doug Duncan, chief economist for the national Mortgage Bankers Association, which tracks such trends. It should be a temporary, albeit nasty, blip.

Besides, isn't housing supposed to be the bright light in our dim economy right now?

Let's hope so. But the rise in second-quarter foreclosures -- to the highest rate since the mortgage bankers group began tracking them in 1972 -- begs a few discomforting questions:

If foreclosures are setting 30-year records at the same time that mortgage rates are so exceptionally low, what will happen when interest rates start to increase?

If so many people are losing their homes when the national unemployment rate remains under 6 percent, what should we expect if the economy weakens again and more people lose their jobs?

If investors are fleeing the wimpy stock markets in favor of real estate, are rising mortgage delinquency and foreclosure rates two big signals of an investment overdose in housing?

Before the answers, some hard data and a little perspective.

At the end of June, foreclosure proceedings were started on 0.4 percent of all mortgages. And 1.23 percent of mortgages were somewhere in the process. (Just one year earlier, not even 1 percent of mortgages were in foreclosure.)

Both are record highs in the past 30 years. (The previous record for loans in the foreclosure process was 1.14 percent in the first quarter of 1999.)

As for delinquencies (the percent of homeowners at least 30 days behind on payments), 4.77 percent of all mortgage loans were 30 days or more past due on June 30. That's an increase from 4.65 percent at the end of the first quarter. But the rate remains below the record for delinquencies, 6.07 percent in 1985.

Mortgage experts seem less perturbed than the business reporters covering Tuesday's foreclosure numbers. So I called mortgage economist Duncan in Washington and asked him directly: Are the media getting too excited over these figures?

"I think so," Duncan said. "The foreclosure and delinquency rates are higher, but they should be temporary. And they also represent structural changes in the mortgage markets."

Pretty lucid comments for an economist. But let's translate anyway.

Duncan does not see a significant trend in the number of people having trouble making their mortgage payments. He thinks things will settle down when the economy firms up.

Duncan also suggests there is an unspoken policy change in America that is encouraging more people to buy and own homes. That has helped boost home ownership from about 63 percent of American households 10 years ago to 68 percent today.

That's a hefty increase (a good public policy). But it's a gain fueled by new mortgage products that include smaller- or zero-money-down payment requirements, more adjustable-rate mortgages (with low teaser rates that more people initially can qualify for), and more competition in the mortgage business that has helped cut expensive fees.

Some of these new-style mortgage loans are "getting stress tested" under poor economic conditions for the first time.

What does that all mean? As more and more people with marginal credit become first-time homeowners, it is only natural to see higher rates of mortgage delinquencies and foreclosures.

"It is not a cause for concern, but for watchfulness," Duncan said.

Just the same, let's play devil's advocate. Three things bother me while staring at the highest mortgage foreclosure rate since I was (gulp) in high school.

First, people are supporting today's consumer buying binge (the savior of the U.S. economy this year) by sucking the equity out of their homes through mortgage refinancings. The effect, points out UBS Warburg mortgage-finance analyst Gary Gordon, is a running down of consumers' last big reserve for savings.

About a third of mortgage refinancings are "cash out" loans in which consumers gain money to spend on goods and services such as furniture or vacations. "It's akin to taking money out of a 401(k) or borrowing against Social Security," Gordon says.

Second, too many homeowners dumbstruck by the year-to-year (or should I say month-to-month?) increases in housing prices assume these gains will go on forever and let them replenish the equity in their homes. Even if the nation is not in the midst of some soon-to-pop housing bubble, home prices are fast outstripping wage gains. That means, on average, fewer and fewer people will be able to afford housing -- without a price correction.

Third, we've all been living the good life in Alan Greenspan's "Low-Interest Rate La-La Land" for many years. That will change. With a rising national budget deficit, the threat of war, and lenders sure to tighten loan standards on debt-laden borrowers, sooner or later interest rates will head north.

That's when all bets are off.

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.